The Minimum Wage & Social Security

Oct 25th 2006

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Congress is again being called on to raise the minimum wage. In fact, some 664 economists, including Nobel laureates Kenneth Arrow, Clive Granger and Robert Solow, have signed a petition prepared by the Economic Policy Institute to show their conviction. Business Week reports their plan is to raise the current minimum wage of $5.15, over several years, to $7.25 an hour. The wage should also be indexed for inflation.

The last time the minimum wage was raised was in 1997, but inflation has eroded any benefits or purchasing power of that wage by some 20 percent, according to Business Week. Although economists have previously labeled the minimum wage as a case of good intentions and bad outcome, economists are changing their song. The generally held view in the 1990s was that a minimum wage increase would raise unemployment among young and unskilled workers.

The impact of such a wage floor has become a battleground among economists since that time. Business Week reports that a survey completed in 2000 found that only 45 percent still believed the 1990s view of a minimum wage.

A major crossroads in the opinions of many economists was a 1994 paper by economists David Card and Alan Krueger titled, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania.” The paper documented the finding that employment in New Jersey fast-food restaurants increased after the state increased their minimum wage. Pennsylvania’s minimum wage remained unchanged and employment in Pennsylvanian fast food restaurants decreased.

Federally, a proposed 40 percent increase in the minimum wage from $5.15 to $7.25 would be phased in over several years, but it has not garnered much support in Congress. That has not stopped 22 states and the District of Columbia from raising their minimum wages. Business Week reports that voters in Arizona, Colorado, Missouri, Montana, Nevada and Ohio will vote on this issue next November 7th, according to the Economic Policy Institute.

The earned-income tax credit (EITC) is a 31-year old vehicle for the raising of the minimum wage. It is the most successful and largest anti-poverty program ever devised by the federal government. It has been shown to increase the rate of labor force participation of single mothers with children. Research by economists Nada Eissa and Hilary Hoynes shows that the program also lifts more children out of poverty than other federal programs, according to Business Week.

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The Economic Policy Institute provides some historical perspective on the minimum wage. The federal minimum wage was first enacted in 1938 as part of the Fair Labor Standards Act (FLSA). In its original language, the minimum wage was to be raised periodically to keep pace with rising prices and wage levels. A commission would set the wage after a public hearing and an evaluation of cost-of-living estimates provided by the Bureau of Labor Statistics (BLS).

In the language of the bill as it was passed, future increases of the minimum wage were left to Congress and the president. The Economic Policy Institute reports that under their guidance, the minimum wage reached its peak in 1968 and currently at $5.15, is at its lowest in inflation-adjusted value in 50 years.

The idea of indexing is finding increasing support again in the form of automatic annual adjustments, according to the Economic Policy Institute. Other state and federal laws use indexing as a means to ensure that benefits do not lose their value in rising prices. In fact, other countries commonly index the minimum wages, as well as U.S. states, with their own minimum wage laws.

The real controversy may come down to finding a reasonable or common index. Rising prices are the standard for other developed countries, either requiring regular meetings of wage boards or implementing automatic increases. There are other indexes though. The Netherlands use average wage growth to index their minimum wage, while some U.S. states use price indexes, of which several are used:

Consumer Price Index – All Urban Consumers (CPI-U). This index is the most widely used of these indexes.

Consumer Price Index for Specific Areas. These indexes serve as useful indicators for the areas they cover.

Indexing the minimum wage to average or median wages would provide significantly different adjustments than cost indexes. Over the past 50 years, the CPI-U has increased 740 percent, according to the Economic Policy Institute. Over the same time period, the average wage for production, non-supervisory workers has increased 922 percent. Even restoring the wage to the approximate level of the 1950s and 1960s, half of the average wage currently, would result in a current minimum wage of $8.40 an hour.

More concerned with fraud and abuse, Congressional Republicans show the least desire to update the EITC, although bipartisan support may be changing. Low-income workers have been forgotten, but they have received attention in other areas than just union-dominated areas. Business Week reports that polls show that nationally, a majority of Americans favor increasing the minimum wage, although changing the EITC will require that sentiment to filter up to Congress.

One item that will be increasing will be Social Security in 2007. Although rising health costs are expected to bite into the 3.3 percent increase for some 53 million people. The Associated Press reports that the average increase will be $33 a month, raising average checks to $1,044.

Some 49 million people receive Social Security benefits, while around 4 million less privileged receive Supplemental Security Income payments. The current cost of living allowance (COLA) was announced by the Social Security Administration last week. The previous increase of 4.1 percent allowed in 2006 was the largest in 15 years, according to the Associated Press.